Australia dollar gains ahead of inflation nail-biter; kiwi rises

[SYDNEY] The Australian dollar strengthened on Tuesday as traders covered short positions ahead of key inflation data and a US Federal Reserve two-day policy meeting beginning later in the session.

The Aussie dollar rose 0.72 per cent in afternoon trading to US$0.7521, breaking above a key resistance level of 75 US cents.

Analysts said inflation data on Wednesday was most likely to decide the near-term fate of the Australian dollar. Economists forecast a dip to a fresh trough of 1.4 per cent, likely cementing the case for another rate cut as early as next week.

The market is pricing in around a 60 per cent chance of a rate cut in August.

"Tomorrow will be a big day for the Aussie. I think there can be quite a bit of volatility over the next 24 hours in the lead up to the CPI release," said IG Markets analyst Angus Nicholson.

"We have seen quite a consistent trade around that 75 cents level. We could see a real change of the recent trading band, perhaps dropping to around 73-72 cents."

The Aussie also gained versus the British pound after dovish comments from Bank of England policymaker Martin Weale.

In a newspaper interview, Mr Weale said he saw the economic outlook differently after much weaker-than-expected British purchasing managers' data, a week after saying he needed firmer evidence before backing an interest rate cut.

But the Aussie dollar fell 0.62 per cent against the yen on doubts the Bank of Japan would take bold action at its two-day meeting that ends on Friday.

Most analysts surveyed by Reuters expect the BOJ to announce some type of additional easing, though there was little consensus on what form it might take and much scepticism over whether it will be any more successful in awakening the economy than past stimulus measures.

Meanwhile, the US central bank is widely expected to stand pat on policy this week, but investors were bracing for any possible signals about a tightening later this year.

Across the Tasman Sea, the New Zealand dollar rose 0.7 per cent on Tuesday to US$0.7044, steadying after two straight weekly falls.

While the Kiwi tested support at 0.6960 overnight "it soon found its feet and has consolidated," said BNZ Senior Market Strategist Kymberly Martin.

New Zealand government bonds eased slightly, with yields up half a basis point across the curve.

Martin expected demand for New Zealand government bonds to remain steady despite historically low yields as returns in global bond markets were even more depressed.

Australian bond futures were marking time into the inflation data. The three-year bond contract was down 2 ticks at 98.56, while the 10-year contract held at 98.0750.

REUTERS